No matter what industry you are in, your business location or financing requirements, applying for funding for a small business can be a nerve-racking process. Small business owners regularly experience as they are making it possible for the potential lenders to evaluate every part of the small business. In case a business doesn’t have satisfactory credit to evaluate the risk, lenders will consider the owners’ financial information. However it doesn’t have to be as intimidating as it appears.
Primarily you need to know what lenders will consider when a business applies for a small business loan. Mainly the lenders will consider the three Cs to determine the risk related to small business lending. And these three Cs are Cash Flow, Credit Score, and Collateral. There was a time when banks and credit unions required businesses to have all three Cs to be considered qualified for loan; however at present the game has changed. The alternatives lenders are the real game changers, business can still get the funding despite missing any of the C.
The Three C’s Of Credit
- Cash Flow
On the subject of cash flow, lenders normally will consider a business’ bank account, business bank statements, credit card statements and accounts receivables. Cash flow incorporates the most weight among all the Cs. Even as lenders for the most part will compare your business bank statements, using software like QuickBooks and Xero and make sure the books are up-to-date and helps provide lenders information that they can reference. One of the common types of underwriting lenders will go through is account receivables. Some other key metrics that the lenders will consider are the daily balance in your bank account, number of deposits every month, and overall range of non-sufficient funds. The higher your average daily balance is, the larger the number of deposits are, and the lower non-sufficient funds, the better.
- Credit Score
One of the misinterpreted elements of looking for working capital is the difference between business and personal credit score. The fact is that business credit score is seldom evaluated. Most lenders will evaluate owner’s personal credit score. To many lenders, your personal financial records are just as important as your business records. Lenders will evaluate the creditworthiness of a business owner as being the indicator of overall management and concerns. This can bring complications for owners who did not handle their finances appropriately in the starting. You need to find help to get your credit back on the track.
Lenders have to consider all the possibilities, and they have to plan for the worst case scenario. So the question is, what can a lender turn to if a business fails? Here the need of collateral arises. Collateral stands for any of the business property or resources; it can be equipment, auto or something else that a lender might ask of you to get a small business loan. And when you fail to pay off the borrowed amount, the lender can seize your collateral to recoup its losses.
Risk Determining Factors
The three Cs of credit will help the lender in determining the risk that a potential business owner carries when applying for a business loan. Now the question here is how many Cs an owner can check off can reveal their apparent risk within lender’s opinion, and also the amount and terms of the business loan. A business can carry a low, medium or high risk based on the number of three Cs they can offer a lender. In case an owner can mark off all the three Cs of credit, they will be considered lowest type of risk for the lender and can get the right type of funding with the lowest possible rate. And businesses lacking any single C are taken into consideration as a medium risk by the lenders. And if only a one C is checked off, then you may still have funding options, but the lenders will consider you as a high risk. The loan with this level of risk may have higher interest rates and unfavorable payment terms.
Despite the level of risk and the three Cs of credit, every business owner needs to know that if they are choosing the right lending product. If that is the case, it is advised to search around for the better lending product. And if you find one compare it with other offers pick the best available deal that suits your condition.
The best business financing program for your small business will depend on;
- How soon you need the loan
- The amount of sales that will be produced by getting the loan
- Your ability to pay off the loan
- The effort required to get the loan
- Time agreed to pay it back
If your business doesn’t make the grade for the traditional funding criteria, that doesn’t mean to lose hope and there is no other financing options available for your business. In fact, the alternative lending is the option that can offer you the perks that traditional funding can’t.